CHICAGO – An Illinois school district under federal scrutiny for its past misuse of bond proceeds saw its rating fall to junk.
Moody's Investors Service lowered the Lincoln-Way Community High School District 210 one notch to Ba1 from Baa3.
The outlook remains negative after Thursday's action.
The rating agency in April had slapped the district with a five-notch downgrade to the lowest investment grade of Baa3, citing its weakened financial position and use of short-term borrowing to deal with fallout from the improper accounting of past bond proceeds. The fresh downgrade impacts $253 million of outstanding general obligation unlimited tax general obligation debt, issuance that helped fund new high schools and is being scrutinized by the U.S. Attorney's Office and the Securities and Exchange Commission.
"The downgrade to Ba1 reflects the district's narrowing financial position, which has necessitated the increasing use of tax anticipation warrants to support operations and the district's elevated debt burden with debt service costs that are scheduled to grow substantially," Moody's wrote.
The district is pressured by capital appreciation bonds that will drive debt service costs up substantially in 2021.
"The negative outlook reflects the district's very narrow cash position and lingering financial uncertainty. While officials are projecting significantly improved financial operations in fiscal 2017, the district has a history of negative variances and any unexpected revenue or expenditure pressures would place additional strain on district liquidity," the rating agency added.
The district serves a population of about 104,000 in six southwest suburbs with what Moody's describes as very large tax base and above-average resident income indices.
It has an enrollment of 7,032.
Enrollment experienced significant gains over much of the last decade, though recent enrollment trends are flat to declining.
In June, the district disclosed that it had received a SEC subpoena ordering it to produce bond-related documents and communications, including statements related to its certification that the offering statements were materially correct. The disclosure was made following a Freedom of Information Act request from the Daily Southtown newspaper.
The SEC subpoena followed a May subpoena from a federal grand jury probing actions of the district and its former superintendent, including the use of bond funds.
The May subpoena sought detailed records related to retired Superintendent Lawrence Wyllie's documents as well as various district documents and contracts including all records relating to misappropriation of federal, state, and local funds to include bond funds, restricted funds, and student activity funds, for the time period of 2006 to the present.
The SEC subpoena demanded documents related to the district's 2009, 2013, and 2015 bond transactions including information provided to the district on the costs, financial estimates, risk, alternatives, and estimates ahead of the transactions from financial team members and escrow agreements. It sought information on the use of proceeds including placement of $10 million of the 2009 bond proceeds into a life safety fund. The district had previously disclosed that money should have gone into a capital fund.
The district has highlighted that it is cooperating and self-reported its accounting errors regarding the bond proceeds and has taken corrective actions.
Last year, the district hired Crowe Horwath to conduct a sweeping review of its accounting practices and use of proceeds from sales in 2006, 2007, and 2009 that helped finance the construction of two new high schools. Voters approved up to $225 million in borrowing in a 2006 referendum. The district has since closed one of its four high schools.
The district said in a statement that the downgrade reflected its past fiscal results and it expects to run a surplus this year as a result of more efficiently operating three schools, rather than four. "Because of the measures that have been taken over the past year, the district is in a position to build reserves for the first time in over a decade. The district will also be able to decrease the amount of short-term borrowing and increase the financial position. The district looks forward to the review of the Fiscal Year 2017 audit," the district's statement read.
